May 13, 2010
Senator
United States Senate
Washington, DC 20510
Re: Reject the Vitter Loophole for Bailed-Out Shadow Banks (S.A. 4003)
Dear Senator,
The 250 consumer, employee, investor, community, small business and civil rights groups who are members of Americans for Financial Reform (AFR) urge you to reject Senator Vitter’s dangerous proposed shadow bank loophole, S.A. 4003. It is an attempt to prevent the oversight of non-bank financial companies that could pose a threat to our economy, including key bailed-out “shadow banks”. Shadow banks – unregulated entities often attached to non-financial companies – received hundreds of billions of dollars in bailouts and were recently the subject of a two-day Financial Crisis Inquiry Commission hearing. A vote for this amendment risks American jobs and keeps us stuck in the bailout era.
Bailed-Out Shadow Banks: Not “Predominate” but “Substantial” and Highly Systemic:
Senator Vitter’s amendment would create a loophole big enough for the bailed-out shadow bank GE Capital, the financial arm of General Electric. While financial services are not the “predominant” business line of the multi-billion dollar corporation, GE Capital is a “substantial” player in the financial market: it was the single largest issuer of commercial paper in the United States before the crisis, with $620 billion in assets at the end of 2007. GE Capital received more than $50 billion in bailouts, and was the second-largest beneficiary of the FDIC debt guarantee program even though it held only a relatively small amount of deposits. By focusing on the way the company is organized and not the magnitude of the threat to our economy, the Vitter loophole’s 85/15 threshold would let financial giants evade even basic oversight.[1]
The danger of creating an explicit loophole is not just which bailed-out shadow banks it would affect today, but what risks it could create going forward. Under the Vitter loophole, AIG could buy a company earning 15% of its total revenues and escape oversight from the new Systemic Risk Council. The American people lost 8 million jobs and $17 trillion in savings because of regulatory gaps like this one.
Fears of the Fed (which was not interested in regulating supbrime mortgages for 14 years though it had the authority) overreaching to regulate light bulbs and car parts are overblown:
1) True Manufacturers Should Not Fear Fed Oversight: Under the current bill, only the rare manufacturers that are attached to massive, systemically risky financial giants competing with the likes of Goldman Sachs in the capital markets would be even eligible for Fed oversight. Even then, two-thirds of the nation’s banking regulators must vote to exercise jurisdiction and any arbitrary or capricious decision would be voidable. [2]
2) Firewalls to Shield the Parent Company from Regulatory Action: In that rare situation where the company’s affiliated financial activities do make it a potential threat to our economy, both the House and Senate bills direct the Fed to create “intermediate financial holding companies” to firewall the financial entity from the parent company—allowing regulators to create safeguards for the high-risk financial player without interfering with the company’s main line(s) of business.
The Vitter loophole for bailed-out shadow banks is an unnecessary and dangerous amendment that would keep American jobs and Main Street businesses vulnerable to another Wall Street-led financial meltdown. If you have any questions, please contact Heather McGhee, Washington Office Director of Demos, at hmcghee@demos.org or (202) 559-1543.
Sincerely,
American for Financial Reform
Click here to download a copy of this letter (doc).
[1] Similarly, the commercial firm GMAC received $12.5 billion in TARP funds, even though GMAC’s parent company General Motors revenues were not “predominately” from financial services.
[2] See Sec. 113. Manufacturers’ internal financing operations are exempted in Sec. 167(b)(2).